Study: People think recessions are much rarer than they actually are

August 17, 2012

Quick, how many recessions has the United States had in the past half century? The answer is eight. Since 1960, the country has gone through one or two recessions per decade, on average. Yet both voters and politicians seem to think economic slumps are far rarer than they actually are — with odd effects on elections and policymaking.

How common is this? (Michael Williamson -- The Washington Post)

Gabriel Lenz, a political scientist at the University of California, Berkeley, recently decided to test voter knowledge on a slew of economic questions, including how frequently recessions occur. "Instead of seeing recessions as a normal part of the business cycle, I had a hunch [voters] would see them as rare events," Lenz writes.

"To a degree," he notes, "their responses confirmed my hunch. The actual number of recessions the US has experienced in the last 50 years is about eight: one in 1960s, two in the 1970s, two in the 1980s, one in the 1990s, and two in the 2000s. However, about 70% answered between zero and five, and 26% picked between zero and two. Only about 20% chose the correct range, which was 6 to 10."

The shaded bars on the graph below shows how frequently downturns have occurred since 1960. In fairness to voters, they have gotten somewhat less frequent over time:

In any case, fine, so most voters don't know this odd bit of economic trivia. Does it matter? Perhaps. Political scientists tend to agree that the economy has a massive impact on presidential elections. If the economy is mired in recession, an incumbent is highly likely to lose. (You can see this on our election model.) And Lenz wonders if this is all due to a misperception: "When the economy happens to experience a downturn in an election year—as it did in 1980 and 2008—[voters] see it as an unusual event with ominous implications, not realizing that recessions regularly occur," he notes. "As a result, they may more often vote against the incumbent party."

What's perhaps even more disconcerting, however, is that policymakers also seem to think downturns are far more infrequent than they actually are. Although no one has polled politicians on this question, we can see it in the historical track record. Jeffrey Frankel, an economist at Harvard, recently studied the budgeting processes in 33 countries around the world. He found that most budget forecasters tend to assume that economic booms will last far longer than they do. Government agencies tend to forget that recessions are a regular fact of life, so they rarely prepare.

This partly explains, Frankel notes, why so few countries follow the standard Keynesian path of storing up surpluses during booms and spending the extra money during downturns. Optimism prevails, and government agencies tend to think downturns happen far less often than is actually the case. (In a new paper, Frankel and Jesse Schreger find that this "over-optimism" is particularly acute among euro zone countries with balanced-budget rules.)

The good news is that it's possible to overcome this bias. Take Chile. Chile has structural budget constraints — here’s a brief explanation. But, as Frankel notes, the country also relies on independent forecasters outside of the government for its growth projections. The data Chile uses when crafting its budgets has historically erred slightly on the pessimistic side. Partly because of that, the country socked away surpluses between 2002 and 2007 and was relatively well-positioned for the recession. At least one country didn't forget that economic slumps do happen.

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Sarah Kliff · August 17, 2012